China Growth

INTRODUCTION

Since the opening of economic reforms in 1979, China has become one of the world's fastest-growing economies. From 1979 to 2005 China's real gross domestic product (GDP) grew at an average annual rate of 9.7%. Real GDP grew by 11.1% in 2006, and during the first quarter of 2007, it rose by 11.1% over the same period in 2006. China is expected to continue to enjoy rapid economic growth over the next several years, provided that it continues to implement needed reforms, particularly in regard to its inefficient state-owned enterprises and the state banking system.

Trade and foreign investment continues to play a major role in China's booming economy. In 2006, exports rose by 27% to $969 billion, while imports were up by 20% to $792 billion. This produced a trade surplus of about $177 billion. From 2003 to 2006, the value of total Chinese trade doubled. On the basis of current trends, China could surpass the United States in 2007 to become the second largest merchandise exporter (after the European Union). Well over half of China's trade is conducted by foreign firms operating in China. The combination of trade surpluses, foreign direct investment flows, and large-scale purchases of foreign currency have helped make China the world's largest holder of foreign exchange reserves at $1.3 trillion as of June 2007.

Although the economy has shown remarkable growth in recent years, Chinese officials have expressed concern over a number of areas that they perceive as threatening future growth, including rising inflation, over-dependence on exports and fixed investment for growth, widening income gaps, and growing pollution. The government has indicated its goal over the coming years to create a "harmonious society" that would promote more economic balanced growth and address a number of economic and social issues.

Therefore, China is now a major player in world trade and its impact on the world is increasingly felt both in developing and developed countries. Thus it is the goal of this research paper to discuss China's growth, bring out the reasons why China has come thus far, and how its growth has and will impact the world economy. Furthermore, this paper will cover three discussion areas: background information on China, China's economic growth past and present, the major Long-Term Challenges Facing the Chinese Economy and the impact of China's economic growth on the world economy.

HISTORY BACKGROUND OF CHINA

After World War II in 1945, China exploded Civil War between Kuomintang (KMT) and China Communist Party (CCP). The stalemate of Chinese Civil War has resulted in two political states using the name China: the People's Republic of China (PRC), commonly known as "China," which controls mainland China, Hong Kong, and Macau; and the Republic of China (ROC), commonly known as "Taiwan," which controls the island of Taiwan and its surrounding islands.

After the Chinese Civil War, mainland China underwent a series of disruptive socioeconomic movements starting in the late 1950s with the Great Leap Forward and continued in the 1960s with the Cultural Revolution that left much of its education system and economy in shambles. With the death of its first generation Communist Party leaders such as Mao Zedong and Zhou Enlai, the PRC began implementing a series of political and economic reforms advocated by Deng Xiaoping that eventually formed the foundation for mainland China's rapid economic development starting in the 1990s. In 1997 Hong Kong was returned to the PRC by the United Kingdom and in 1999 Macau was returned by Portugal.

Today, the People's Republic of China represents all of mainland China while the Republic of China continues to exist on Taiwan. The PRC is governed under the one-party system by the Chinese Communist Party, but the ROC has moved towards a more democratic government.

Since 1978 the People's Republic of China (PRC) government has been reforming its economy from a Soviet-style centrally planned economy to a more market-oriented economy while remaining within the political framework provided by the Communist Party of China. This system has been called "Socialism with Chinese characteristics" and is one type of mixed economy.

The reforms replaced collectivization of Chinese agriculture with privatization of farmlands, increased the responsibility of local authorities and industry managers, allowed a wide variety of small-scale enterprises to flourish, and promoted foreign investment. Price controls were also relaxed. These changes resulted in mainland China's shift from a planned economy to a mixed economy.

The economic reforms have helped to lift over 400 million Chinese out of poverty, bringing down the poverty rate from 53% of population in 1981 to 8% by 2001. During the 1980s, these reforms led to average annual rates of growth of 10% in agricultural and industrial output. Rural per capita real income doubled. Industry posted major gains especially in coastal areas near Hong Kong and across the strait from Taiwan, where foreign investment helped spur output of both domestic and export goods. China became self-sufficient in grain production; rural industries accounted for 23% of agricultural output, helping absorb surplus labor in the countryside. The variety of light industrial and consumer goods increased. Reforms began in the fiscal, financial, banking, price setting, and labor systems.

For much of the population, living standards have improved dramatically and the room for personal choice has expanded, yet political controls remain tight. However,

China is now faced with a number of other economic problems, including a rapidly aging population and an increasing rural-urban income gap.

China's economic growth past and present

Since the introduction of economic reforms, China's economy has grown substantially faster than during the pre-reform period (see table below). From 1960 to 1978, real annual GDP growth was estimated at 5.3% (a figure many analysts claim is overestimated, based on several economic disasters that befell the country during this time, such as the Great Leap Forward from 1958-1960 and the Cultural Revolution from 1966-1976). During the reform period (1979-the present), China's average annual real GDP grew by 9.7%; it grew by an estimated 10.7% in 2006 over the previous year. Since economic reforms were begun, the size of the economy in real terms has increased eleven-fold, and real per capita GDP (a common measurement of living standards) has gone up eight-fold. Data for the first quarter of 2007 indicate that real

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